Dairy Talk

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Dairy Programs Reduce Volatility, But…

Sep 30, 2010

Analysis of three alternatives to current dairy policy show they all reduce milk price volatility, but do little to enhance price, and in one case, actually decrease average prices paid to dairy farmers.

The analysis, done by economists at the University of Wisconsin, Cal Poly and the Food and Agriculture Policy Research Institute (FAPRI), show the supply management programs offered by the National Milk Producers Federation, the Holstein Association and Agri-Mark can reduce wild swings in milk prices. But the Holstein Association price stabilization plan, as characterized in the Costa-Sanders bill, would actually reduce average U.S. All-Milk prices by 69¢/cwt relative to FAPRI’s baseline.

Under baseline conditions, FAPRI assumes a resurgence of dairy cash receipts to U.S. dairy farms from a low of $24 billion in 2009 with a steady climb to nearly $40 billion in 2019. The baseline includes continuation of the dairy price support program and Milk Income Loss Contract payments. (Government outlays for these support programs are only about $500 million over the 11 years.)

Scott Brown, a FAPRI economist, says the baseline assumes a resurgence in the U.S. economy over the period and continued growth in U.S. dairy exports as the world economy recovers as well. In the FAPRI economic model, Brown then overlaid the National Milk Producer’s Foundation for the Future Program. That program does away with dairy price supports and MILC payments and sets up a margin protection insurance program.

In the FAPRI model, the U.S. All-Milk price under the Foundation plan almost mirrors the baseline program. It exceeds baseline by a mere 2¢/cwt in 2011, and then is slightly less than baseline for the remainder of the decade. “The NMPF program changes result in vary small changes in market supplies, demands and prices,” Brown says.

He says the margin protection insurance provision will likely be triggered less than 10% of the time, but the program can be thought of as a safety valve in periods of low margins. And because producers will be paid nothing for a few percentage points of their milk when those triggers occur, he assumes supply will adjust quickly to those non-payments.

The All-Milk price under FAPRI’s baseline will be $15.32/cwt from 2013 through 2019. Work done by economists at the Universities of Wisconsin and Cal Poly show the Foundation’s all-milk price will be 17¢/cwt higher than that, Agri-Mark’s 23¢ higher. But the Costa-Sanders bill would be 69¢ lower than baseline, 86¢ lower than the Foundation’s, and 92¢ lower than Agri-Mark. Costa-Sanders would also likely result in lower Class III prices than the other three scenarios--44¢ lower than baseline, 92¢ lower than Agri-Mark and $1.15 lower than the Foundation plan.

One advantage of Costa-Sanders is that it reduces price volatility the most. Baseline variation is 83¢ while Costa-Sanders is 28¢, Agri-Mark, 30¢ and Foundation, 35¢. The Costa-Sanders plan would increase fluid milk sales by 100 million lb., but only because milk prices would be lower.

The point of all this modeling is not that they are dead-on accurate, acknowledge economists. But they do give dairy producers a starting point in evaluating relative differences. Each program has its advantages, but there are clear differences as well. Let the tweaking begin, and the debate continue.